(Reuters) —U.S. telecom regulators on Thursday
voted to limit how much spectrum Verizon Communications
Inc and AT&T Inc will be able to buy in next year's
auction of highly valuable wireless airwaves.

In a 3-2 vote along party lines, the Federal Communications
Commission approved a plan that would reserve part of the spectrum
in each market for carriers that do not already have substantial
blocks of low-frequency airwaves there, largely restricting the
participation of Verizon and AT&T.

Sprint Corp and T-Mobile USA Inc had urged the FCC to ensure their
two biggest rivals did not dominate the auction. FCC Chairman Tom
Wheeler had agreed, saying last month that Verizon and AT&T already
controlled almost two-thirds of the coveted low-frequency airwaves.

The final rules, however, represent something of a compromise that
reserves some airwaves for smaller carriers while ensuring that
larger providers would be able to get sizeable chunks of spectrum in
the unreserved portion.

The FCC's rules are based on current market structure, meaning that
if Sprint acquires T-Mobile, for example, the rules would be
revisited and could be rewritten.

"Investors are responding to hope of a merger. The less stringent
the rules are on spectrum, the more leeway you have to allow one.
The more even the playing field for all providers, the less you are
excluding a potential combination of the two," said Roger Entner of
Recon Analytics.

The auction, planned for mid-2015, would be a first opportunity in
years for wireless carriers to buy the low-frequency airwaves
considered the beachfront property of radio spectrum for their reach
and strength.

The rules set on Thursday would reserve up to 30 megahertz of
spectrum in each market for bidding by non-nationwide carriers or
companies with less than one-third of low-band spectrum in that
market.

The reserve would kick in after the auction raises enough spectrum
and revenue to help fund a new $7 billion public safety network and
pay back TV stations, which would volunteer to relinquish airwaves
for wireless carriers to buy in the auction.

Verizon and AT&T applauded the compromised plan and AT&T said it
plans on bidding at least $9 billion for 20 MHz in the incentive
auction.

Verizon and AT&T had strongly opposed the plan, arguing it was
unfair, would complicate the auction and could hurt how much money
the FCC ultimately raises in the sale.

The FCC also voted along party lines to expand the so-called
spectrum screen, a calculation of what airwaves are usable for
wireless, to include more of the airwaves currently controlled by
Sprint and Dish Network Corp, among other things.

Any spectrum acquisitions involving low-frequency airwaves or deals
that tip one company over one-third of the screen in a market would
trigger extra scrutiny.